The New Telecom Tsars

Telecom Software

• TCS, India’s largest software firm 
• CMC, the ex-PSU 
• Tata Elxsi

Internet Access

• VSNL comes with India’s largest subscriber base. TataNova will be merged with it.

Telecom Hardware

• Tata Telecom has India’s highest PBX installations

Long-Distance Telephony

• VSNL is currently monopoly in international calls, and comes with free national long distance licence

Broadband

• Tata Power’s optic fibre projects will now merge with VSNL’s

Cellular Telephony

• Tata-Birla-AT&T will get national cellular footprint once merger with BPL is complete

Basic Telephony

• Tata Teleservices is operational in Andhra. Four more circles, including Delhi and Gujarat, will start soon.

There is much jubilation and activity in Bombay House. Executives huddle in closed-door meetings, top managers pull in information from all possible ends and financial analysts work overnight to prepare a brand new strategy for the Tata group's telecom businesses. Indian industry's best-known name has just pulled through one of the most lucrative deals in the Indian corporate sector.

On February 5, the government announced that the Tata group had won the bid for acquiring a 25 per cent stake in India's biggest Internet Service Provider (ISP) and currently, the International Long-Distance (ILD) monopoly, the state-owned VSNL or the Videsh Sanchar Nigam Limited.

The Tata offer, priced at Rs 1,439.25 crore, was 18 per cent higher than the government's reserve price of Rs 1,218.375 crore and 7 per cent higher than rival Reliance Industries' Rs 1,346.625 crore. As per the rules, the Tatas will now make an open offer—expected within the next four weeks—to acquire another 20 per cent in VSNL, amounting to Rs 1,100 crore more.

Post acquisition, the Tata Group emerges as one of the biggest integrated telecom and information technology players in the country (see chart). It can now give established player Bharti and newcomer Reliance a run for their money.

The group's telecom businesses have so far been scattered in all directions—cellular, basic, ILD, broadband and Internet access—with a leading position in none. This buy gives them an overall lead in many. The Tata operations have so far been spearheaded by Tata Power, which has already committed huge investments in telecom, including an estimated Rs 3,500 crore for basic telecom services and Rs 880 crore for an optical fibre cable (OFC) backbone.

The Tatas have a major presence in cellular telephony through a tie-up with Birla-AT&T. The proposed merger with BPL Telecom would give it a national footprint covering Madhya Pradesh, Chhattisgarh, Gujarat, Maharashtra, Andhra Pradesh, Kerala, Tamil Nadu and Goa, apart from the metro circles of Delhi and Mumbai. The combine is expected to start services in the coveted Delhi circle by March-April. In basic services, the group already operates in Andhra and has licences for the four major circles of Delhi, Gujarat, Karnataka and Tamil Nadu. It also has an ILD licence.

Although a late entrant in the ISP business, the group completed its portfolio by launching its ISP service TataNova in mid- 2001. In IT, the group has under its fold India's largest software exporter, TCS, that recently shopped government-owned CMC Ltd. TCS has considerable expertise in telecom software apart from operations in telecom hardware.

Acquiring VSNL is a win-win situation for Ratan Tata in his strategy to roll out convergence services under one umbrella. According to Tata group officials, their overall telecom-IT plans were being revamped and a new strategy was being worked out for which top executives sat in meetings from February 7. While officials were not at liberty to give out anything, Outlook learnt that all telecom and IT initiatives could now be led by one single company under the Tata fold. This could even be a new entity.

In the process, the group's financial position gets enhanced manifold. Apart from business synergies which will translate into higher revenues and cost savings, the group's turnover rises overnight by about 15 per cent. Says Ratan Tata: "We are pleased to have been successful in our bid for VSNL, which will facilitate the enhancement of the spectrum of our telecom services. This meaningful acquisition will enable us to meet our objective faster and help in providing end-to-end quality services to our customers."

The NYSE-listed VSNL is a debt-free company with a turnover of Rs 7,966 crore in 2001.Even after dividend payouts, it still had surplus cash of Rs 1,200-1,500 crore. So, the Tatas get tremendous leverage, both in terms of borrowing and access to the VSNL coffers for NLD, ILD and basic telephony expansion and their subsequent consolidation.

Says Kobita Desai, senior analyst, telecom and mobile, for Gartner India: "VSNL's creditworthiness is very high and in telecom that matters a lot. Internal funds are good for market development. The Tatas will thus get very good business terms. One year down the line, they might even think of an IPO." Analysts also think that a lot of funds originating from Tata Power and Tata Sons can now be routed through VSNL. Says Rahul Singh, telecom analyst, SSKI Securities: "Post acquisition, the flexibility and options for funds have considerably gone up."

VSNL has the country's strongest Internet and NLD infrastructure, including an extensive national network, international gateways and alliances with global undersea links apart from being India's biggest and, till recently, exclusive international bandwidth provider. The Tatas now have access to India's biggest ISP and also a lead over all other ILD players. The bonus: a free NLD licence that VSNL got as compensation for losing its ILD monopoly.

Operationally, the Tatas get a headstart over competitors in NLD and ILD infrastructure by about six months. Also, for two years, the entire long-distance traffic from MTNL and BSNL will be routed to VSNL. Says Desai: "Even if the Tatas only manage to retain the current business, they would have their hands full."

Threats to the Tata march may come from the upcoming Bharti-Singtel undersea cable and Reliance's aggressive laying of its OFC backbone. Says Singh: "If this deal did not happen, the Tatas possibly had to spend Rs 500-1,000 crore to replicate the VSNL backbone." Adds Anant Deep Katare, telecom analyst with Khandwala Securities: "Prime real estate also comes with the package."

But is the long-term picture as rosy? After the ILD monopoly is over, VSNL earnings will drop drastically in the next two years as rates are bound to head southwards. Naturally, some analysts are pessimistic. Points out Katare: "In India, the net margin in ILD is 22 per cent and return on net worth is 25.51 per cent. With a progressive fall in tariffs, there will be a squeeze on margins. New technologies like Internet telephony will provide even cheaper options."

Desai disagrees: "In ILD, relations matter a lot and the kind of alliances VSNL has with world players is amazing. It'll take a long time for others to reach there. VSNL has been in this business for years and already has a sustainable model in place. Others need time to get things going."

Another obvious question is: did the Tatas pay too high a price? While VSNL insiders and some analysts nod affirmatively, Anup Bagchi, COO, ICICI Direct, considers the valuation favourable as VSNL is debt-free with a P/E of 4-5. Add to that the right of management control. The only challenge now, he feels, is managerial. "With competition, the P/E may increase dramatically, forcing the Tatas to spruce up its HR initiatives to sustain the advantages on a long term basis. "

There's much speculation in the market. Says Rajesh Jain of Pranav Securities: "Although Reliance would have brought more competence into VSNL, I see no harm with the Tatas either. They have left enough room for the strategic partner." But Jain also feels "old technology, locational disadvantage and bloated workforce come with VSNL as excess baggage. Tatas will also have to streamline investments with VSNL's. It's a marriage where you've to move with your partner". Adds Desai: "There's not much clarity on the HR front. Though Tatas may not retrench, do they have the resources to maintain VSNL's huge employee base? There could be an upheaval that could be detrimental to the alliance." VSNL has a workforce of around 3,000.

Kaushik Poddar, director, KB Capital Markets, is more direct. "The Tatas are a confused lot and the burst of ideas is clearly lacking. Look at how they missed out on their TCS advantage. Had VSNL been such a hot property, why should it have been sold at a discounted book value?"

Such big-ticket sell-offs inevitably attract diverse opinions but as Ratan Tata seals the deal over the weekend, the group's return to favour with Delhi is emerging as the talking point including off-the-record confessions of bureaucrats and senior ministers about the eventual disinvestment of Air-India to the Tatas. It's perhaps just a coincidence that Prime Minister A.B. Vajpayee wrote a poem for the Indica launch!

Arindam Mukherjee and Arijit Barman